Despite Exchange Rate Surge… Last Month's Foreign Exchange Reserves Increased [Hankyung Forex Market Watch]

Despite the sharp rise in the won-dollar exchange rate following President Yoon Suk-yeol's declaration of martial law, our foreign exchange reserves have actually increased. It appears that instead of aggressive market intervention to defend the exchange rate, volatility was controlled through micro-adjustments, and there were also returns from foreign asset management.

According to the Bank of Korea's announcement on December 6, 2024, the foreign exchange reserves at the end of last month were recorded at $415.6 billion. This is an increase of $2.1 billion from $415.39 billion in November last year. By category, securities decreased by $5.72 billion to $366.67 billion, but deposits increased by $6.09 billion from $19.13 billion to $25.22 billion, leading to an overall increase in foreign exchange reserves.

Initially, there were significant concerns in the market that last month's foreign exchange reserves could decrease significantly. This was because the need for market intervention by the foreign exchange authorities increased as the exchange rate surged following the declaration of martial law on the 3rd of last month. In reality, the exchange rate rose steeply. The rate, which closed at 1,402.90 won on the 3rd of last month, jumped to the 1,440 won range after the martial law declaration that night and rose to 1,472.50 won by the end of last month. During this process, there were even forecasts that the foreign exchange reserves might fall below the $400 billion mark as the authorities sold dollars.

Contrary to concerns, the increase in foreign exchange reserves is analyzed to be because the intensity of market intervention by the authorities was not as strong as expected. It is understood that the Bank of Korea and the Ministry of Economy and Finance responded with micro-adjustments (smoothing operations) aimed at reducing volatility instead of active intervention to lower the exchange rate.

Even in the situation of a sharp rise in the exchange rate last month, they only made verbal interventions like "We will take market stabilization measures if volatility intensifies," and the actual intervention volume was also seen as limited by the market.

Bank of Korea Governor Changyong Lee also stated at a price briefing in mid-last month, "We conducted smoothing operations after the martial law situation," and added, "Since then, the exchange rate has been moving similarly to the dollar's movements." He further explained, "There are many concerns that the foreign exchange reserves might rapidly fall below $410 billion and, in the medium term, below $400 billion, but it has not fallen below $410 billion."

Additionally, the increase in foreign currency deposits by financial institutions at the end of the quarter is also cited as a factor for the increase in foreign exchange reserves. The Bank of Korea explained that significant returns were also generated from the management of foreign assets.

Reporter Kang Jin-kyu josep@hankyung.com